Bernstein: Waters beats expectations in the third quarter, with room for upside to its 2027 growth framework

Where did third-quarter results beat expectations?

Waters reported third-quarter revenue of 1.767 billion dollars, above the market consensus of 1.754 billion dollars. Organic revenue grew 10% at constant currency, exceeding market expectations of 8.6% and reaching the top of the company’s 8%–10% guidance range.
Adjusted earnings per share were 4.10 dollars, up 21% year over year and 0.05 dollars above the top of the company’s guidance range. Revenue in the Analytical Sciences segment grew 9% at constant currency, with broad-based growth in demand from pharmaceutical and biotechnology customers. That growth did not yet include a contribution from pharmaceutical manufacturing returning to the US.
The company raised its 2026 organic revenue growth guidance from 7%–9% to 9.1%–9.7%, and its adjusted earnings per share guidance from 14.45–14.65 dollars to 14.60–14.70 dollars. The midpoint of full-year revenue guidance increased by 43 million dollars, translating into earnings per share at an operating margin of approximately 28%.

The legacy Waters business grew approximately 20% in China in the third quarter, with organic growth of 11% year to date. The legacy BD Biosciences business also returned to growth in China for the first time in 10 quarters; the earlier-than-planned start of local production was a key driver.
Management expects local production, improved execution and the effects of diagnosis-related group payment policies entering the comparison base to add a combined approximately 2 percentage points to Biosciences growth over the next several quarters, compared with the first half of 2026.
The recovery is uneven: third-quarter China revenue in the microbiology business still fell by more than 20%, affected by related payment policies. Molecular diagnostics and point-of-care testing revenue also declined 6% because of the timing of channel inventory and a reduction in respiratory testing.

The company’s preliminary framework assumes high-single-digit growth for the legacy Waters business and mid-single-digit growth for the legacy BD business in 2027, with combined organic growth slightly above the mid-single digits. The assumptions for both businesses are below their respective growth rates in the second half of 2026.
Assuming the adjusted operating margin improves by 1 percentage point to 29.2%, the company’s framework implies low-double-digit adjusted earnings per share growth. Cost synergies will help improve the margin, but including the first six weeks of the acquired business, which were not included in 2026 results, in 2027 will create approximately 0.7 percentage points of margin pressure.
Bernstein believes the framework does not fully account for potential incremental contributions from improvement in China, new products and pharmaceutical manufacturing returning to the US. Waters has secured tens of millions of dollars in orders related to new US pharmaceutical plants, with a delivery cycle of approximately six months, according to management; these orders are not included in the preliminary framework.

Third-quarter free cash flow was 68 million dollars, affected by approximately 81 million dollars in BD business integration, restructuring and SAP-related costs, as well as 240 million dollars in timing-related items. The latter mainly included receivables arising from strong sequential sales growth and system migration.
Nearly 150 million dollars in transition services agreement receivables owed to the company by BD tie up cash in 2026. Management expects this use of cash to become a source of cash around 2028 as the business migrates to Waters’ systems.
Bernstein maintained its outperform rating and raised its price target from 450 dollars to 535 dollars. The firm lowered its 2027 earnings per share forecast from 17.00 dollars to 16.77 dollars, while raising the price-to-earnings multiple used in its valuation from 27 times to 32 times. The price target also incorporates discounted cash flow and enterprise value-to-EBITDA valuations.